The Czech Republic seems to have worked its way out of the Soviet-imposed misery that lasted through the 1980s; the state appears to have shed its dreary image of concrete housing blocks and Communist inefficiency. The Czech Republic joined NATO in 1999 and the European Union in May 2004, signifying the promise of a growing “New Europe.” Czech economic indicators seem positive: real growth is steady, and foreign direct investment (FDI) is remarkably high. However, despite a few promising statistics and much optimistic rhetoric, a closer look reveals that the Czech economy has made distressingly little progress.

Even the most positive economic signs do not indicate categorical success. Growth of real gross domestic product (GDP), a hallmark of developing prosperity, is expected to rise above four percent in 2004 and has remained steady over the past decade. But real GDP growth was disappointing during the first half of 2003, barely exceeding two percent and disappointing those who had anticipated roughly four percent growth. Even this modest figure of expansion is likely overestimated, for some of it is attributable to an election year financial stimulus package passed by the Social Democratic Party’s parliamentary coalition.

Although the Czech Republic is the leading FDI recipient among European transition economies, this exceptional ability to attract foreign capital for growth also provides a misleadingly rosy picture of the state’s economic situation. The distribution of foreign investment across sectors of the economy and geographic regions of the country is extremely uneven, with the northwestern region languishing far behind Prague and its environs. The Organisation for Economic Cooperation and Development (OECD) noted in its 2003 survey of the Czech Republic that inefficient and chronically unprofitable domestic industries remain prevalent in areas overlooked by foreign capital sources.

Disparity across economic sectors is particularly important in considering wages and employment in the Czech Republic. Unemployment in the first quarter of 2003 was over 10 percent, the highest percentage since 1990. On balance, wages lag far behind those in Poland, one of the most prosperous of Central European states since Soviet rule, and are instead competitive with wages in Slovakia, which is less developed. Furthermore, wages are growing much faster in the public than in the private sector. Some domestic economists have expressed concerns over the sustainability of current wage growth, arguing for diversification of wages within the public sector (that is, proportionally smaller wage increases for less skilled workers). A wage structure that overvalues unskilled workers relative to professionals reduces the monetary incentive for individuals to acquire skills through education, which may then hamper technological development and the economic growth it can facilitate.

This concern seems validated by the experiences of education and health care professionals. Data from the Czech Statistical Office reveal that monthly wages in these fields were surprisingly low; in 2001, better average compensation could be found in manufacturing and construction. Teachers in the Czech Republic made just US$700 per month on average in 2002, while assistant university professors’ starting salaries were roughly 80 percent of the mean national wage of roughly US$655. Such figures hardly bode well for the intellectual and technological future of the Czech Republic. This problem of under-compensation has a simple explanation: EU states spend an average of six percent of annual GDP on education, while the Czech government spends only four percent.

The country’s socialized health care system provides a more compelling example of the dangers of low wages for professionals in government-run industries. Doctors are defecting from the Czech Republic in search of higher salaries and shorter workweeks abroad because they might easily make five to eight times more money while working fewer hours in Western Europe. As a result, doctors are almost nonexistent in some of the country’s border communities. The town of Cheb, for instance, has a hospital but diverts its patients to a facility 30 minutes away because almost all of its formerly employed doctors are now in Germany. Unless compensation grows, whether through further privatization or a salary increase for the state-employed, this drain of educated professionals will likely continue.

The irony of the stingy treatment of state-employed educators and doctors is that the Czech government has come under fire for being one of Europe’s most profligate states. Despite concerns over mounting deficits in 2002, the 2003 budget substantially increased government expenditures; the 2003 deficit is a record 7.6 percent of GDP. The government’s lack of fiscal discipline has drawn rebukes from the OECD and the International Monetary Fund, and it complicates Czech integration into the European Union, whose Maastricht Treaty requires that government deficits measure no more than three percent of GDP.

Criticism has also been levied against the government’s seeming failure to address easily correctable economic inefficiencies. The corporate regulation structure is considered weak; “soft” corporate loans from state-run banks have bailed out inept domestic producers that should have declared bankruptcy, and state-favored monopolies exist in the telecommunication and energy industries. The state-run Czech Railways earns the OECD’s special mention as a budget drain.

It is incongruous that a state emerging from the shadows of Communism should be criticized for spending extravagantly, patterning wages, and tolerating industrial inefficiencies. But these facts confirm that the progress of the post-Communist Czech economy, though frequently touted, has been disappointing.